Trickle-Down Economics: The Basics of Trickle-Down Theory

Trickle-down economics refers to any policy in which wealthy people and corporations receive tax cuts, stimulus, or deregulation in an effort to boost growth for the entire economy.

Also known as supply-side economics, trickle-down economics got its colloquial name from early twentieth-century humorist Will Rogers. Advocates believe it unfetters the free market to produce prosperity, while critics think of it as a cynical ploy to line the pockets of the rich while making empty promises to lower-income earners.

Trickle-down economics combines ample amounts of both deregulation and tax cutting. Here’s how it works in theory:

• Cutting corporate taxes: Proponents of trickle-down economics believe lowering the corporate tax rate is an innately positive public policy. For instance, Arthur Laffer, an economist from the Reagan administration, insisted lower taxes spur growth almost as a law of nature. He depicted this in his Laffer curve diagram, which is a source of contention between rival schools of economists.
• Deregulating industries: Alongside ample tax breaks for corporations, supply-side economists advocate for vast deregulation of industry in general. They believe this spurs innovation, increases prosperity, and affords the middle class a greater range of products to choose from as consumers.
• Reducing income tax rates: Trickle-down economists believe top marginal tax rates should be as low as possible. This means very low taxes for millionaires and billionaires, as well as reduced capital gains taxes and estate taxes (which predominantly pull in money from the wealthiest individuals in society.)
• Spurring economic growth: From the vantage point of trickle-down economics, higher taxes stifle the economy while lower taxes make it prosper. The stated goal of this approach is to increase government revenue and overall GDP (gross domestic product) through tax cuts and deregulation. In turn, this should—at least in theory—lead to an improvement in living standards for everyday people as much as the wealthy. Policymakers of this ilk also try to influence the Federal Reserve to set interest rates advantageous to greater investment.

Many different presidents have passed some form of trickle-down economic legislation during their tenure in office. Here are four examples of such policies from the twentieth and twenty-first centuries:

1. 1. The Bush tax cuts: In the early 2000s, President George W. Bush made widespread tax reform one of his administrative pillars. The trickle-down economic theory served as the basis for these tax cuts. He reduced both the estate (or inheritance) tax and income taxes for the wealthy, as well as for the middle class, with help from Congress.
2. 2. Hoover’s Great Depression stimulus: After the Crash of 1929, President Herbert Hoover believed the best remedy to the ensuing depression was to provide vast degrees of relief to corporations and industry titans. His attempts at doing so were unsuccessful, leading to widespread public backlash. This culminated in the election of President Franklin D. Roosevelt, who ran on an opposing economic platform known as the New Deal.
3. 3. Reaganomics: President Ronald Reagan is almost synonymous with trickle-down or supply-side economics. His administration worked with Congress to pass two tax reform bills during the 1980s. These brought the top tax rate down by almost fifty percentage points for high-income earners, from 73 percent to 28 percent. While he was pursuing his regulatory and tax policies in the United States of America, the UK’s prime minister Margaret Thatcher was pursuing similar economic reforms across the pond.
4. 4. The Tax Cuts and Jobs Act of 2017: President Donald Trump worked alongside congressional Republicans to pass a sweeping series of tax cuts for high-income earners and wealthy corporations in the first year of his presidency. He lowered the top marginal tax rate from 35 percent to 21 percent and the top corporate tax rate from 39 percent to 21 percent. No Democrats voted for the bill, highlighting the disparity of viewpoints on the efficacy of trickle-down policies between conservatives and liberals.

Economic analysis has shown the strengths and weaknesses of trickle-down economics when it comes to crafting real-world policy. While it might increase tax revenue and help spur growth, it also comes with these limitations:

• Exacerbating income inequality: High-income earners use their vast amounts of extra income to purchase more assets to further grow their wealth. Middle-class and lower-class people have far fewer resources to grow their own personal wealth in the same manner. This allows the wealthy to accrue more capital as the middle and lower classes lose out on their own slices of the economic pie.
• Incentivizing greedy behavior: Many wealthy corporations do not reinvest the money they receive into R & D (research and development) or labor improvements. Instead, they retain the money in the forms of executive bonuses, stock buybacks, and corporate savings. This negates the notion that cutting corporate taxes would lead to boons for everyday workers.
• Preventing course corrections: Policymakers might also have a hard time reversing course if they find trickle-down economic policies don’t live up to expectations. To do so, raising taxes would be essential. This is a political nonstarter for most parties as they believe it will result in widespread electoral backlash. Certain politicians insist this would not be the case so long as these increases targeted the same wealthy taxpayers the initial cuts did.

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